Bursting the Bubble Bubble

Smartmoney.com, October 16, 2006
By Ray Hennessey

I'VE HAD QUITE ENOUGH of bubble talk. Any time anyone talks about real estate nowadays, their faces turn grave and they speak of the value of their home as if they've just seen the asteroid that's going to make us go the way of triceratops. House values are falling, mortgage rates are rising, inventory of existing homes is growing. Repent. The end of the world is nigh.

I'm not so sure. If anything, now may be the right time to buy or sell real estate.

Full disclosure: I speak with the conviction of someone who has to be right, since I'm one of the potential losers in the midst of selling one property and buying another. But this is more than the alcoholic explaining to himself in the middle of the night that he can hold his liquor. I'm in the real-estate market today because I believe the time is right, and the apocalypse will wait.

Here's why: There are still buyers in the market. I know; they've traipsed their muddy boots through an open house at my existing place, and, oddly, left full handprints all over my bathroom mirror. (I choose not to ask.) One of these buyers, with the blessing, will write me a check and change the name on the mailbox. What may be different now than, say, even a year ago is that these folks are more price-sensitive. They have choices, and less competition, so they're in a position to negotiate. As a seller, I had to respond by listing my place at a realistic price, even, in some cases, undercutting the price tags of comparable homes in my area. Shudder the thought.

But, ah, you may say. There lies proof that the bubble is bursting. Prices are going
down. I'll concede that, as I must, but it ain't a bubble. Bubbles burst, often with a quick drop in prices where values of assets fall by 50% or more. It happened with tulips and web-content companies, but it's not happening in housing. Real estate just isn't that liquid. You can't buy and sell it quickly. God forbid if you could. Given the conditions in the market, quick real-estate transactions would've driven home prices even higher, where a three-bedroom townhouse with riparian rights could be bandied around like another Pets.com. Then, the fall in prices would be more severe. But that's not the nature of this particular beast. Instead, we have prices coming down to levels where thinking people, after a long, often tedious, process, are willing to buy. That sounds like an efficient market to my ears.

Will I get less for the place I'm selling now than I would've a few years ago? Sure.

Will I still make money on it? Of course. I have a colleague who complains about having to come down about $100,000 on his house to attract buyers. He's still tripling the amount he paid for the place. Yet, he talks like Ben Bernanke broke into his house, stole money from his 401(k) and kicked his dog on the way out. Perspective, methinks, is in order.

And, speaking of Bernanke, let's look at rates for a second. Mortgage rates are higher, but they're not historically high. And, as a buyer, I've been amazed at their elasticity. I'm not locking in quickly because there's a chance that rates will go down.

And banks are competing for my business by offering me attractive deals. Reasonable
rates, a healthy inventory, realistic prices. Ayn Rand would be proud.

Are there areas at risk? Yes. I'm buying a home, not a property, so my time horizon for growing the value of my real estate is long. Those who are speculating in the market are more likely to lose out than in the past. Also, new home builders, as we've seen, are in a bit of trouble, but that's mostly their own fault, since they made the bad business decision of overbuilding, swelling supply and overstripping demand. Serves 'em right.

Also, there are a bunch of people who are going to get caught short because they bought too high and took an exotic mortgage to boot. When adjustable-rate mortgages start re-setting, some people are going to find their monthly payments soar. But, again, the fault can be laid at the feet of the buyers, not the banks. (I'm not giving mortgage brokers a free pass, mind you. I'm still offered all sorts of deals that I need a nautical chart and abacus to figure out. But I'm an old-fashioned guy who likes to curl up with a glass of port and a 30-year fixed.) Still, many people simply made the conscious decision to buy more house than they could afford. They'll now have to sell, or face foreclosure. But rather than ending up moving into a Fridgidaire box outside Penn Station, they'll downsize. And probably end up in a more modest home they should've purchased in the first place.

So, please, for the sake of all that's holy, stop talking about the housing bubble. For one thing, it just makes you look uninformed. And, worse, it may scare buyers away from the place I'm trying to sell.